Corporate Bond Fund - Homogenous Category?
MF shots (Part 11)- is an exclusive series of article which will try to explain in each category of mutual fund. This article focuses on Corporate Bond funds which invest in corporate & govt issuance.
Estimated time to read - 4 minutes
Overview -
MF shots - name describes itself where Mutual Fund categories are explained in a brief manner to avoid clutter of information. The current article is continuation of MF shots series by Cellestial Wealth. Previously I have written about short term & medium term debt mutual funds of which can be found by clicking on each category. Each article takes less than 6 minutes but states a few key pointers to be looked upon when choosing a category.
Overnight fund – invests in securities with maturity of 1 day.
Liquid fund – invests in securities with maturity of 91 days.
Ultra short duration funds – invests in securities with maturity of 3-6 months
Low duration funds - invests in securities with maturity of 6 months to 1 year.
Money market funds - invest in securities with maturity upto 1 year.
Short duration funds - invest in securities with maturity ranging from 1 to 3 years.
Medium duration funds - invest in securities with maturity ranging from 3-4 years.
Medium to Long Duration funds - invest in securities with maturity ranging from 4-7 years.
Long duration funds - invest in security with maturity of more than 7 years.
Dynamic Bond funds - invests in securities with varying maturities.
Brief –
Corporate bond funds invest in securities issued by government & corporates having credit rating of AA+ & above. The category is clustered with 21 AMC’s having presence in this category with AUM of Rs. 1.51 Lakh crores.
This article is going to be a short & crisp version as schemes under the category are homogenous.
Investment objective –
The main objective of this category as implied by the name is its investments in corporate debt instruments. But the caveat here is minimum credit rating required, i.e. if a fund manager wants to invest in company XYZ it should have a minimum credit rating of AA+ & higher then only the security can be invested in.
The key differentiator for the category – is that it has no time duration constraint imposed ( can invest for any time horizon) on it but only has credit rating constraint (AA+ & above credit rating required).
Suitable for which type of goals –
Goals which don’t have defined time horizon & have moderate risk tolerance can be invested in this category.
What parameters to check –
1. Portfolio holdings –
The proportion of portfolio invested in government versus corporate securities would define the yield of portfolio. Higher investment in corporate would increase yield of portfolio compared to 100% investment in government security.
2. Duration of portfolio –
The average maturity of fund should match the goal duration. This factor should be monitored periodically as portfolio might change over a period of time.
3. Fund manager –
The experience of fund manager in security selection & portfolio allocation is key for return of capital along with return on capital. Also, the duration/ maturity of portfolio is to be decided by fund manager which can be differentiator in returns.
Interesting insights –
1. All funds (except L&T) have portfolio duration less than 3 years
2. Average yield of category is around 5%.
3. L&T Triple Ace bond fund has modified duration of 5 years.
4. As the category limits have been pre-specified by SEBI, the returns & expense ratio of all schemes in the category are rangebound +/- 1%, implying the similarity of returns in the past.
Conclusion –
The above image looks like the wo are bananas one is ripe & other is raw, but the tow are different. Plantains look similar to unripe yellow bananas. Plantains actually belong to the banana family, but they’re high in starch and low in sugar. They remain green when they become ripe and should always be cooked before eating. (Source)
So, the corporate bond fund category is similar to above example as the returns are almost similar within the category & expense ratio ratios too being similar. Also the returns are slightly higher than offered by alternatives.
The default/ downgrade risk exists. Currently, there is 1 corporate bond fund which has a segregated portfolio due to default or credit downgrade in the portfolio reflecting inherent risk of investing in this category.
Overall, the category can be used to invest when one is looking to invest in corporate securities & government securities with no time horizon defined.
I am AMFI registered Mutual Fund Distributor . In case you have mutual fund queries or would like to invest in mutual funds, let me know on my Email - chirag.jain48@yahoo.com or +91-7567473055.
AMFI registration number - ARN-187955
Notes -
Link to full data sheet can be accessed here.
Top 10 funds by highest AUM -
Top 10 funds by lowest expense ratio -